continued on page 3

HIGHLIGHTSUNITED STATES

www.colliers.com

FALL 2010 | RETAIL

RoSS J. MooRE Chief Economist | USAJARED DIENSTAg Regional Research Analyst

After a very challenging period, most shopping centers are starting to show rising occu-pancy and a firming of rents. Helping shopping center owners is an economy that is once again expanding and consumers who appear to have the confidence to go out and spend. While the U.S. retail landscape continues to exhibit disappointing fundamentals, some segments are slowly beginning to show signs of life. Retail landlords and investors remain concerned about losing tenants, but not to the same degree as in 2009. Many landlords have now turned their attention to attracting new tenants and filling vacancies created during the economic downturn. Dominant regional malls and grocery-anchored neighbor-hood centers continue to be the strongest performers, with outlet malls also enjoying a period of strong demand. Power centers, lifestyle centers and community centers are still struggling, but as with every downturn, the strongest centers continue to outperform their peers. With development at a virtual standstill, however, vacancy rates for these three retail formats should enjoy a modest decline.

The U.S. economy grew 2.5 percent in the third quarter, the fifth consecutive quarter of positive growth. Third quarter growth was up slightly from 1.7 percent annualized growth reported during the second quarter. Much of the increase in GDP came from growth in

Retail Slowly Getting Back to Normal

MARkET INDIcAToRSRelative to prior period

U.S. RETAIl MARkETSUMMARy STATISTIcS, Q3 2010

Fall 2010

Spring 2011*

VAcANcy

NET ABSoRPTIoN

coNSTRUcTIoN

RENTAl RATE

*Projected

Vacancy Rate: 10.9% Change from Q4 2009: 0.32

Absorption, Year-to-Date: 4.2 Million Square Feet

New Construction, Year-to-Date: 5.4 Million Square Feet

Under Construction: 5.0 Million Square Feet

Asking Rents Per Square Foot: Shopping Center Space: $16.24 Change from Q4 2009: -4.85%

With the retail landscape much improved, retail real estate fundamentals are sure to get better in the coming quarters.

U.S. RETAIl REAl ESTATE MARkET, Q3 2009 – Q3 2010

Mill

ion

Squa

reFe

et

Vaca

ncy

(%)

Q3 2010Q2 2010Q1 2010Q4 2009Q3 2009

Absorption Completions Vacancy

-4

-2

0

2

4

6

8

10.0

10.5

11.0

11.5

12.0

U.S. RETAIl SURVEy

MARkET

EXISTINg INVENToRy* (SF)

SEP. 30, 2010

NEW SUPPly 2009 (SF)

NEW SUPPly yTD 2010

(SF)

UNDER coNSTRUcTIoN

(SF)

ABSoRPTIoN 2009 (SF)

ABSoRPTIoN yTD 2010

(SF)

VAcANcy RATE (%)

DEc. 31, 2009

VAcANcy RATE (%)

SEP. 30, 2010

QUoTED RENT SEP. 30, 2010

(US$ PSF)

cHg. IN RENT yTD 2010 (%)

Atlanta, GA 137,557,000 1,524,000 65,000 357,000 (2,047,000) (523,291) 14.7 15.0 13.57 -7.5Bakersfield, CA 8,916,000 – 0 35,000 – 76,746 – 7.5 15.32 -Baltimore, MD 46,362,000 609,000 30,000 144,000 (634,000) 244,888 8.7 8.6 18.63 -0.6Boise, ID 12,250,000 – 82,000 14,000 – 257,927 – 12.4 12.27 -Boston, MA 85,857,000 690,000 292,000 135,000 (30,000) 394,101 8.1 7.6 15.70 -1.8Charleston, SC 12,922,000 – 166,000 0 – 63,871 – 10.8 14.68 -Charlotte, NC 51,715,000 306,000 26,000 27,000 228,000 147,826 10.4 12.1 13.10 4.5Chicago, IL 163,410,000 1,565,000 121,000 154,000 (520,000) (810,949) 11.7 12.4 16.19 -2.9Cincinnati, OH 34,250,000 203,000 0 10,000 (322,000) (33,234) 13.4 13.0 11.09 -2.5Cleveland, OH 51,046,000 266,000 106,000 20,000 (583,000) (39,997) 12.1 12.5 11.49 -1.4Columbia, SC 15,040,000 – 30,000 0 – 181,699 – 8.4 11.19Columbus, OH 28,451,000 412,000 59,000 181,000 474,000 220,714 15.0 13.8 12.01 6.0Dallas/Ft. Worth, TX 151,308,000 1,457,000 299,000 272,000 801,000 (741,299) 13.0 13.3 13.22 -5.3Denver, CO 69,031,000 221,000 233,000 258,000 (232,000) 544,200 10.9 10.3 14.47 -3.9Detroit, MI 69,944,000 1,102,000 270,000 60,000 262,000 232,932 16.2 16.2 12.63 -3.6Fresno, CA 24,701,000 – 0 0 – 48,749 – 10.9 13.64 -Ft. Lauderdale/Broward Co., FL 49,624,000 89,000 23,000 7,000 (1,450,000) 341,398 10.6 10.1 17.74 -5.2Greenville/Spartanburg, SC 28,912,000 29,000 0 46,000 (427,000) 162,156 12.3 11.9 9.71 -5.1Hartford, CT 41,422,000 646,000 6,000 109,000 327,000 246,691 8.6 8.1 13.55 -2.6Hawaii 17,077,242 92,000 0 – 107,322 – 4.2 31.74 -Houston, TX 147,577,000 1,069,000 199,000 103,000 2,044,000 1,757,964 12.2 10.9 14.09 -10.0Indianapolis, IN 38,650,000 173,000 26,000 9,000 (326,000) 242,593 13.8 13.2 11.89 -3.3Jacksonville, FL 34,089,000 333,000 149,000 18,000 (856,000) (31,313) 13.2 13.5 13.81 -5.7Kansas City, MO-KS 39,216,000 189,000 12,000 53,000 (27,000) 64,262 13.5 14.8 11.92 -2.1Las Vegas, NV 49,666,000 577,000 161,000 43,000 (550,000) (240,801) 13.8 15.3 18.29 -16.1Little Rock, AR 14,680,000 – 50,000 0 – 68,027 – 8.3 8.88Los Angeles – Inland Empire, CA 83,672,000 1,329,000 53,000 115,000 (1,082,000) 771 11.7 11.8 18.10 -13.5Los Angeles, CA 143,674,000 1,074,000 409,000 366,000 (1,022,000) 87,737 6.4 6.8 24.04 -1.1Louisville, KY 27,172,000 – 76,000 51,000 – (344,097) – 11.8 11.19Memphis, TN 29,519,000 24,000 25,000 116,000 106,000 252,087 12.6 12.7 10.96 -5.4Miami/Dade County, FL 44,091,000 472,000 89,000 35,000 (455,000) 304,153 7.2 6.6 22.06 -4.8Milwaukee, WI 33,627,000 146,000 18,000 250,000 (66,000) 85,242 11.2 11.3 12.26 -3.5Minneapolis, MN 53,731,000 11,000 78,000 242,000 (214,000) 255,233 9.8 9.7 14.00 2.4Nashville, TN 29,771,000 706,000 58,000 61,000 197,000 110,330 11.0 10.9 13.98 -5.9New Jersey – Northern 90,870,000 463,000 576,000 297,000 (783,000) 192,828 8.1 8.5 19.72 -1.1Oakland/East Bay, CA 42,445,000 132,000 38,000 39,000 (643,000) (14,315) 7.8 7.5 23.52 -5.7Orange County, CA 62,257,000 222,000 3,000 18,000 (800,000) (247,687) 6.1 6.6 23.42 -4.3Orlando, FL 62,386,000 888,000 92,000 203,000 (1,203,000) 180,318 11.8 11.7 15.92 -3.9Palm Beach County, FL 35,984,000 244,000 16,000 20,000 (534,000) 100,219 11.1 11.1 18.07 -8.4Philadelphia, PA 148,561,000 1,784,000 423,000 291,000 (800,000) 377,665 10.0 10.1 14.51 -1.4Phoenix, AZ 102,755,000 1,290,000 225,000 36,000 (1,677,000) (853,012) 13.9 15.4 15.46 -6.4Portland, OR 34,409,000 60,000 105,000 8,000 (377,000) 41,706 8.0 8.4 18.42 -0.6Raleigh/Durham/Chapel Hill, NC 37,744,000 1,124,000 11,000 224,000 429,000 80,018 9.2 9.2 15.11 -6.7Reno, NV 10,788,000 – 8,000 8,000 – (53,155) – 15.2 16.31Sacramento, CA 48,302,000 314,000 74,000 0 (912,000) 128,753 13.6 14.0 18.24 -4.6San Diego, CA 55,563,000 302,000 38,000 71,000 (842,000) 108,747 7.4 7.6 21.80 -2.6San Francisco, CA 9,967,000 160,000 0 12,000 (35,000) 5,878 4.3 5.1 29.03 2.7San Jose/South Bay, CA 31,498,000 40,000 235,000 29,000 (595,000) 45,588 6.2 6.9 27.17 4.3Seattle/Puget Sound, WA 55,760,000 710,000 66,000 26,000 (273,000) (223,279) 8.8 9.9 18.37 -4.3St. Louis, MO 51,852,000 167,000 22,000 0 91,000 465,994 11.6 11.1 12.73 0.6Stockton/San Joaquin Co., CA 19,259,000 – 13,000 0 – (171,658) – 10.7 16.63Tampa/St Petersburg, FL 86,186,000 1,039,000 112,000 0 (1,334,000) 98,247 11.0 11.2 13.88 -1.4Washington, DC 81,185,000 812,000 36,000 398,000 (794,000) (6,929) 7.6 7.8 22.12 1.8Westchester County, NY 52,349,000 109,000 141,000 30,000 427,000 266,686 6.7 6.6 19.22 -5.1U.S. ToTAl/AVERAgE 2,971,972,000 25,082,000 5,446,000 4,997,000 (17,059,000) 4,150,000 10.58 10.90 16.24 -4.85

*Includes Community and Neighborhood Centers. Source: CoStar, Colliers Research

P. 2 | collIERS INTERNATIoNAl

HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES

consumer spending (2.8 percent), equipment and software (16.8 percent), exports of goods and services (6.3 percent) and federal government consumption expenditures and gross investment (4.0 percent). Final sales of domestic product came in at 1.2 percent, highlighting the tepid nature of the underlying economy.

Although the economy continues to underperform, other indica-tors displayed healthy growth. The Institute for Supply Management (ISM) reported a modest increase, rising 2.5 points in October to register 56.9. According to the ISM index, new orders (+7.8) and production (+6.2) rose significantly in October, a welcome sign and hopefully a harbinger of future growth. Of the 18 industries tracked within the ISM index, 14 reported growth, highlighting the broad nature of the recovery in manufacturing. However, it was not all good news, as supplier deliveries (-1.1), inventories (-1.7), and backlog of orders (-0.5) all went in reverse.

The Institute for Supply Management also reported a monthly increase in the non-manufacturing sector, albeit at a slower pace than the manufacturing sector. The October non-manufacturing index came in at 54.3, a 1.1 point increase over the prior month. The primary categories that saw growth included business activity (+5.6), new orders (+1.8), and prices (+8.2). Despite overall growth, the survey is clouded by mixed opinions regarding business conditions varying by industry and company. Both the manufac-turing sector and non-manufacturing sector indexes were characterized by rising employment, at +1.2 and +0.7 respectively. coNSUMER coNFIDENcEThe key to any significant bounce back in retail is consumer confidence. The Conference Board’s Consumer Confidence Index (CCI) increased slightly

in October after producing mixed results through the year. The CCI declined from 53.5 in August to 48.6 in September, but then increased in October to 50.2. The October reading is a bit higher than the 49.8 reported in October 2009, but is off from the 2010 high of 63.3 reported in May.

With the benefit of hindsight, it is apparent that the improved read-ings in the CCI earlier in the year came as consumers believed the economy was more on the mend than it actually was. Relief that the worst had passed was slowly replaced with nervousness about the challenges that lay ahead and the lack of sustainable job growth only reinforced people’s concerns.

There have been months in which the CCI improved, yet consumer spending levels headed lower so it would be a mistake to draw too close a parallel, but the general trend in consumer confidence is usually instructive as to where retail sales are going. There may not be an exact relationship between the CCI and consumer spending, but they are closely connected. In summary, it is highly unlikely consumer confidence will significantly improve (translat-ing into stronger retail sales) until the labor market strengthens.

Without a doubt, the biggest challenge ahead for retailers and retail landlords is the hole left by the loss of 7.5 million jobs since the end of 2007. As this report went to press, the latest available statistics indicated a 9.6 percent national unemployment rate in October. This figure was unchanged from September, but lower than the 10.2 percent reported in October 2009. On a positive note, holiday season hiring is expected to increase this year.

HolIDAy SHoPPINg SEASoN PREVIEWOctober retail sales figures have been mostly positive, although growing at a relatively slow pace. The International Council of Shopping Centers (ICSC) reported that October comparable chain

coNSUMER coNFIDENcE SURVEy, 2002 - 2010

2002 2003 2004 2005 2006 2007 2008 2009 2010

Inde

x

0

20

40

60

80

100

120

Source: Conference Board, Nov. 2010

U.S. gRoSS DoMESTIc PRoDUcT gRoWTH, 2001 - 2011

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Annu

al %

, SAA

R

-8-7-6-5-4-3-2-1012345678

projected

Source: IHS Global Insight

HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES

collIERS INTERNATIoNAl | P. 3

store sales increased by 1.6 percent from October 2009. ICSC estimates that November sales will show annualized growth of three to four percent, with many retailers expected to begin holi-day marketing campaigns and sales earlier than usual. SpendingPulse, a division of MasterCard, reported that year-over-year total retail sales for October (excluding auto and gasoline) grew by 2.7 percent, with apparel sales (8.2 percent), luxury (excluding jewelry, 4.2 percent), and eCommerce (7.9 percent) leading the way. It was disappointing, however, that the consumer electronics and appliances category declined by 3.1 percent.

Following lackluster years in 2008 and 2009, the National Retail Federation (NRF) is forecasting a 2.3 percent increase in holiday

sales this year. The NRF predicts consumers will spend $447.1 billion this holiday season. Last year, sales rose slightly, increasing by 0.4 percent, after declining 3.9 percent in 2008, the worst holiday shop-ping season in over 40 years. The NRF recently released its annual Holiday Consumer Intentions and Actions Survey, which found that consumers plan to spend an average of $688.87 on their holiday shop-ping this year, up 1.0% from last year. Spending on gifts alone is projected to increase 2.1 percent from last year, for a total of $518.08.

It appears consumers are attempting to find the middle ground between the free spending years of the mid-2000s and the sharp pull-backs of 2008 and 2009. Although the recession is technically over, most consumers continue to think twice before buying items that they do not consider to be necessities. With unemployment remaining high, wage growth minimal and high levels of personal debt, many consumers are simply not in a posi-tion to increase their holiday spending. However, there is another segment of consumers who believe the worst is behind and that if they were going to lose their jobs, they would have done so by now. Members of this group have been conservative with their spending for the last two years, but now feel they can increase their spending this holiday season—just not to pre-recession levels.

Unlike in recent years, retailers appear to be better prepared to manage inventory levels this holiday season in order to avoid large quantities of unsold items. In the last few years retailers were forced to offer very steep after-holiday discounts to get unsold items off their shelves. Since retailers feel they have a better idea of consumer spending this year, they are more likely to maintain profit margins and be in a better position financially as 2011 begins. Also, many retailers are aggressively opening pop-up loca-tions this holiday season as a method to increase sales and another way to move inventory.

We forecast improvement in holiday retail sales over last year, particularly in light of the relatively successful back-to-school shopping period. Although holiday sales will be a far cry from the pre-recession years, a successful holiday season would be a great boost to retailers and the general economy and provide momen-tum going into 2011. Although most indicators point towards an improved holiday shopping season, most consumers are focused on taking advantage of retailers’ sales and promotions, trying to purchase as much as possible without exceeding their budgets. Overall, most retailers should come out of the holiday shopping

yEAR-To-DATE SAlES ENDINg SEPTEMBER

cATEgoRy 2010 2009ANNUAl

cHANgE (%)

All Stores 3,221,217 3,031,686 6.3 Motor Vehicle and Parts Dealers 573,561 525,291 9.2 Gasoline Stations 322,027 273,507 17.7 Food and Beverage Stores 436,104 426,214 2.3 Grocery Stores 390,610 381,852 2.3 Health and Personal Care Stores 194,348 188,378 3.2 Building Material and Garden Equipment Stores

217,124 207,909 4.4

General Merchandise Stores 432,031 419,573 3.0 Department Stores (excluding leased departments)

126,893 127,791 -0.7

Clothing and Accessories Stores 150,909 144,512 4.4 Furniture, Home Furnishings, Electronics and Appliance Stores

138,763 135,135 2.7

Furniture and Home Furnishing Stores 66,918 65,385 2.3 Electronics and Appliance Stores 71,845 69,385 3.0 Sporting Goods, Hobby, Book and Music Stores

60,925 58,760 3.7

Miscellaneous Store Retailers 87,037 82,164 5.9 Nonstore Retailers 253,372 224,093 13.1 Food Services and Drinking Places 355,016 346,150 2.6

Source: U.S. Census Bureau. All values are expressed in millions of U.S. dollars and are not seasonally adjusted.

RETAIl SAlES, lESS AUToS AND PARTS, JAN. 2001 - SEP. 2010

121086420

-2-4-6-8

-102001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Annu

al P

erce

ntag

e Ch

ange

(%)

Source: U.S. Census Bureau

P. 4 | collIERS INTERNATIoNAl

HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES

season with a modest increase in sales and a little more confident about expansion and possibly new stores.

RETAIl SAlES By cATEgoRy Year-to-date (YTD) sales to the end September rose 6.3% over the same period in 2009. However, this number was skewed by autos (and parts) and gasoline sales which expanded by 9.2% and 17.7% respectively. By comparison the bellwether general merchandise group registered YTD gains of 3.0%. Within the various retail sectors the most rapid growth (excluding autos, gasoline sales and non-store retailers) were clothing and accessory stores along with building material and garden equipment stores with YTD growth of 4.4%. At the other end of the spectrum was department store sales which contracted by 0.7% YTD. Posting modest growth were furni-ture and home furnishing stores that saw YTD sales grow by 2.3%. Grocery stores also saw YTD sales grow by 2.3%.

RETAIl VAcANcyDespite the fact that several major U.S. markets are beginning to see vacancy rates level off, or in some cases decline, the majority of markets are still characterized by rising vacancies. Overall vacancy for the U.S. shopping center market at the end of the third quarter stood at 10.90 percent, a modest increase from 10.58 percent recorded at the beginning of the year. Of 54 major U.S. markets, 17 recorded vacancy of 12 percent or higher, up from 15 metros at the end of the fourth quarter of 2009. Detroit remains at the top of the list with a third quarter vacancy rate of 16.2 percent. Other markets that reported vacancy greater than 15 percent include Atlanta, Las Vegas, Phoenix, and Reno. Detroit’s economy has been battered by the fall of the automotive industry, while the others were significantly impacted by the collapse of the residen-tial real estate market. Booming housing markets caused retailers to open up new stores and led to a jump in retail construction. As foreclosures picked up and residential property values fell sharply, once-full shopping centers witnessed significant blocks of space become vacant. Until the housing market stabilizes and unemploy-ment declines, vacancy rates are likely to remain high in these markets. Cities that recorded a 100 basis point increase or more in vacancy during the January – September period were Charlotte, Kansas City, Las Vegas, Phoenix, and Seattle/Puget Sound. On a positive note, 16 markets reported a decline in vacancy. However, only two (Columbus and Houston) experienced a decrease of more than 100 basis points during the same period.

Of the 20 markets that have vacancy rates lower than 10 percent, 18 are located on either the East or West coasts, with only two markets (Little Rock and Minneapolis) being non-coastal. Most of

these markets have been able to weather the storm slightly better because a majority of them have growing populations, positive demographics and barriers to entry (new construction).

In many of these markets, expanding retailers have taken advan-tage of vacant space that was returned to the market and as a result prevented vacancy rates from skyrocketing. However, in many cases the high number of retailers that have either gone out of business or closed locations has been too great for expanding or new retailers to occupy all of the vacant space. Since each market has been impacted by different factors, recov-ery will vary in both timing and strength but a key theme running through every market will be an upturn in housing and the creation of new jobs.

occUPANcy gRoWTH/ABSoRPTIoN TRENDSYear-to-date absorption through to the end of the third quarter registered 4.2 million square feet, a significant improvement from last year when full year 2009 occupancy levels dropped by 17.1 million square feet. Unlike last year, a majority (38) of the 53 major markets tracked posted positive occupancy gains in the first nine months of 2010. By far, the Houston market recorded the greatest increase in occupancy with net absorption exceeding 1.7 million square feet. Including Houston, seven markets (Boston, Denver, Ft. Lauderdale-Broward County, Miami/Dade County, Philadelphia, and St. Louis) recorded YTD net absorption in excess of 300,000 square feet by the end of the third quarter. Much of the recorded occupancy gains came from national retailers who have been increasing their market share by opening new locations at sites that were previously thought unattainable. Although posi-tive absorption clearly does not guarantee a healthy market, it is encouraging that many markets are now characterized by occu-pancy gains and not contraction.

Despite overall positive absorption, there were still markets that saw negative absorption. Atlanta, Chicago, Dallas/Fort Worth, Louisville, and Phoenix all saw occupied space contract by more than 300,000 square feet. Several of these markets were some of the hardest-hit regions in the housing collapse, with a resulting collapse in demand for retail space. Markets that registered negative absorption have not been aided by national retailers’ increasing their presence or the creation of “mom and pop” shops and regional retailers that have typically been a key source of demand.

RETAIl coNSTRUcTIoNWith most major markets oversupplied, and demand for retail space still relatively tepid, it comes as no surprise that new retail

HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES

collIERS INTERNATIoNAl | P. 5

construction remains soft. New retail develop-ments added to the market in the first three quarters of 2010 totaled just 5.5 million square feet, compared to 25.1 million square feet in 2009. Of the 54 major markets tracked, three added in excess of 300,000 square feet; Los Angeles, Northern New Jersey, and Philadelphia. Both Los Angeles and Northern New Jersey recorded single-digit vacancy rates with Philadelphia just above 10 percent (10.1 percent). More markets than not (36) have added less than 100,000 square feet to the market thus far in 2010, compared to only six markets in 2009.

With regard to projects under construction at the end of the third quarter, the total for all markets was only 5.0 million square feet. Only three markets (Atlanta, Los Angeles, and Washington, DC) have over 300,000 square feet under construction. Developers remain content to wait on the sidelines for the retail market to pick up before they proceed with any new centers. A combination of little demand and a very challenging financing environment will keep new retail projects to a minimum for the next few years. Similar to the office market, going forward most retail projects that do get underway will have to secure pre-leasing commitments prior to breaking ground which should help to prevent large vacancies developing any time soon.

RENTAl RATE TRENDSAs expected, the majority (37) of the 54 surveyed markets recorded rental rate declines during the first nine months of 2010. A significant portion (15 markets) experienced a decline of at least 5.0 percent. As at the end of the third quarter, the annual average asking rental rate was $16.24 per square foot, compared with

$17.07 per square foot at the beginning of the year - a drop of 4.85 percent. Markets that experienced the sharpest declines include Las Vegas (-16.14 percent), Los Angeles-Inland Empire (-13.48 percent), and Houston (-10.03 percent). Although asking rental rates have declined almost 5.0 percent across the country, it is more accurate to emphasize that actual rental rates (after concessions) have dropped anywhere from 10.0 to 20.0 percent, depending on the market. Not all markets recorded declines: Charlotte, Columbus, Minneapolis, San Francisco, San Jose/South Bay, St. Louis, and Washington, DC all experienced an increase in asking rental rates during the first three quarters of the year.

During 2009 and the beginning of 2010, not only did landlords lower asking rental rates for new leases, but both local “mom and pop” shops and national retailers asked landlords for rent relief on existing leases; and in most cases, compromises were reached. However, with retail conditions on the upswing reducing rents on existing leases has largely come to an end. Most landlords agreed to reduce rental rates on existing leases because the fear of losing tenants far outweighed income loss from lower rental rates. Landlords already had to worry about filling vacancies left by tenants that could not be saved by reducing rent, so if they could prevent further vacancies, they were mostly willing to negotiate with retailers. The consensus now is that retailers that required rent relief on existing leases have already received it. However, leasing dynamics still remain in the tenants’ favor with the econ-omy far from robust and consumer spending remaining relatively fragile, landlords are still being pressured to lower rents and offer generous tenant improvements (TI’s). Because of high vacancy, a lack of expanding retailers, and the extremely low number of new retail businesses being formed, tenants have plenty of leverage

U.S. RETAIl REAl ESTATE INVESTMENT PERFoRMANcE, 1999 - 2010

9.6 7.8 6.713.7

17.1 23.0 20.013.4 13.5

-4.1-11.9

7.5*

-11.8

18.0

30.421.1

46.840.0

11.8

29.0

-15.8

-48.4

27.2 28.3**

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Annu

al T

otal

Ret

urns

%

* YTD 2nd Quarter returns only** YTD Oct returnsPrivate Equity Public Equity

Source: National Council of Real Estate Investment Fiduciaries, National Association of Real Estate Investment Trusts

RETAIl SPAcE DElIVERIES, 2000 - 2011

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Squo

re F

eet,

Mill

ions

0

50

100

150

200

250

*projectedSource: CoStar

P. 6 | collIERS INTERNATIoNAl

HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES

when negotiating lease terms with landlords. Retailers also hold most of the power in renewals: in order to prevent tenants from leaving their current space, landlords are being forced to offer competitive lease terms on renewals. However, top tier shopping centers where retailers continue to report high sales have been largely immune to this trend of concessions and lower lease rates.

lookINg AHEADRetail has always been highly sensitive to the economic cycle, and in particular employment, but this has probably never been more true. Consumers remain cautious and until a more robust recovery takes hold, are unlikely to return to their spendthrift ways. As a result, retailers will be highly selective when opening new stores and are likely to only pursue what they consider the “best real estate” in the market. Although some consumers are slowly increasing their spending, believing the worst is over, a large segment of the population still is not ready to splurge on unneces-sary items. In the meantime, retail sales will fluctuate month-to-month, with most retailers reporting moderate year-over-year increases. Core properties located in well-populated areas are expected to see increased foot traffic and sales, while centers that were built in communities based on future housing development will see little improvement anytime soon.

Although credit markets have been slow to loosen up, it is encour-aging to see more lending institutions open to investing in commercial real estate. Unlike the pre-recession years when lend-ers were quick to provide debt capital, financing will primarily only be available for core assets that do not pose any significant degree of risk. Even though lenders are expected to be more accommoda-tive in 2011 than in recent years, they will remain very selective in which properties they lend against, following strict underwriting standards. Poorer quality properties will continue to sit on the market as the sellers of these properties find it difficult to attract buyers (and lenders) willing to take on the risks associated with investing in non-core assets.

We anticipate the sales market will remain dominated by prime real estate occupied by well known retailers, preferably with strong credit ratings. Single-tenant triple-net leased properties are sure to remain in high demand also. Triple-net properties were the first retail property type to witness a drop in cap rates and are more than likely to continue leading cap rates lower. Strong retail properties are sure to continue attracting multiple bids and occa-sionally command sale prices higher than the asking price. Single tenant triple-net leased properties in particular will continue to be highly sought after because they offer investors a low-risk invest-ment through tenants who typically have strong credit and have

signed long-term leases with regular rent increases. Another retail property type that should see an increase in activity does not have a label, but are generally 5,000 to 10,000 square feet and contain multiple tenants (typically three to five), at least two-thirds of which are national tenants. These are attractive to investors because most of these tenants signed long-term leases with regu-lar rent increases, similar to single-tenant triple-net leased prop-erties. As for shopping centers, grocery-anchored neighborhood centers are expected to account for most retail properties trading hands as investors look to purchase properties that are well-leased and easiest to fill if vacancy occurs. The overall volume of sales transactions is expected to increase by at least 20% in 2011 as more investors return to the market in search of yield and the stable nature of retail real estate.

We expect retail vacancies to be marginally lower by the spring as occupancy gains should exceed any new supply that comes on to the market. Although each market should be viewed separately, average asking rental rates across the country will most likely be flat at least through to the middle of 2011, while construction will continue to decline for the foreseeable future. Retailers that survived the recession will continue to focus on increasing their market share as they take advantage of low lease rates offered by landlords who are extremely motivated to fill large vacancies. Landlords of specialty or themed centers will look to reposition their properties by attracting tenants that are expanding in what can only be described as a very “challenging” leasing environ-ment. Discount stores, athletic gyms, apparel discounters, grocery stores, and quick-service restaurants are almost certain to be the dominant retailers active in the marketplace. Progress is likely to be slow but the retail landscape will almost certainly look better as 2011 unfolds. There will be no easy fixes and unfortunately a “rising tide will not raise all boats.”

S&P RETAIl INDEX (RlX), NoV. 2007 - NoV. 2010

150175

200225250275300325350375400425450475500

Inde

x

2007 2008 2009 2010

Source: MarketWatch.com

HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES

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FoR MoRE INFoRMATIoN

Ross J. MooreChief Economist | USATEl +1 617 722 0221EMAIl ross.moore@colliers.com

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HIGHLIGHTS | FALL 2010 | RETAIL | UNITED STATES